Edited version of private advice

Authorisation Number: 1052414565705

Date of advice: 30 June 2025

Ruling

Subject: CGT - abandon a debt

Question 1:

Did a capital gains tax event C2 occur when the Deed of Loan Forgiveness was signed?

Answer:

Yes.

Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gains tax (CGT) asset is any kind or property, or a legal or equitable right that is not property. A debt owed to a lender is a CGT asset for the purposes of section 108-5 of the ITAA 1997.

CGT event C2 happens under subsection 104-25(1) of the ITAA 1997 if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited.

In this case, you lent funds to Company X which resulted in Company X having a debt to you. When you entered into the Deed of Loan Forgiveness a CGT event C2 happened in relation to the monies still owing to you by Company X at that time (the Debt) due to you abandoning the Debt at that point.

You will make a capital gain if the capital proceeds from the CGT event C2 occurring are more than the asset's cost base, and you will make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Question 2:

Is any capital gain or capital loss you made as a result of forgiveness of the Debt disregarded?

Answer:

No.

Any capital loss you make from a personal use asset is disregarded under subsection 108-20(1) of the ITAA 1997.

Paragraph 108-20(2)(d) of the ITAA 1997 states that a personal use asset includes a debt arising other than in the course of gaining or producing your assessable income.

In this case, you expected to receive dividends from Company X in relation to the lent funds. Therefore, the debt owed to you in relation to the lent funds is not viewed as a personal use asset under section 108-20 of the ITAA 1997.

Accordingly, any capital gain or loss made as a result of the CGT event C2 occurring when you signed the Deed of Loan Forgiveness is not disregarded.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company X was registered, being a being a private company which operated a business.

You and Person A were the directors of Company X and each held one of the two shares issued by Company X.

You and Person A lent funds to Company X during numerous income years, with the lent funds being recorded in the Company X's Balance Sheets.

The main purpose of the lending the funds was to enable Company X to purchase equipment and for running costs of the business as follows:

•                     Purchase of a truck, excavator and bobcat; and

•                     Funds paid to Company X when it had lost money to other businesses going bankrupt, with the money being used to pay for materials, wages and subcontractors.

The lent funds were loaned to Company X on an interest free basis. You expected to receive dividends from Company X's profits, and when Company X was in the position to do so, you would receive loan repayments from future profits either from Company X's growth and profits, or future sales value.

Company X ceased trading a significant time after it had been registered.

During the following income year, you signed a Deed of Loan Forgiveness which outlined that you wished to forgive the loan agreement between you and Company X for a specified amount, the debt. Both parties agreed that the loan was to be extinguished, with no further claims on the parties.

During the following income year Company X was deregistered.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-20